Continuing Economic Saga

I hope you are following the news about the proposed Treasury bail-out. After listening to Secretary Paulson today, I am even less inclined to give him the benefit of the doubt. Making me even more skeptical was seeing VP Dick Cheney visiting Capitol Hill today to twist some Republican arms. We have seen this movie before: run up to a portending crisis, inflammatory rhetoric to force quick Congressional action with minimal consultation, arm twisting by the VP, and tough talk to push through the legislation without reading the fine print: not subject to oversight, no court review and a waiver from prosecution, all decisions of the executive branch are final. Sound familiar?

While there is no question that there is an economic crisis that needs to be addressed, as Senator Dodd stated today, "It is important to get this right the first time. There will be no chance for a redo." So I hope the rest of his colleagues heed this advice. So how can they address the crisis? They should just merge under capitalized financial institutions with good ones using their existing authority and FDIC insurance to protect the depositors. Perhaps they could just make secured loans to banks who need liquidity. The terms of the loan could limit executive compensation until the loan was repaid. If they intend to buy non-performing assets or "bad loans," I for one would like to see something more similar to what was set up for the S&L crisis with an agency like the RTC with government employees rather than outsourcing to Morgan Stanley or Goldman Sachs. At least that would eliminate the obvious conflict of interest. The idea that the government will buy the non-performing assets at a reasonable price is fiction. The reason the banks are in trouble is because these securities can't be priced right now since there is no market for them. Further it will be difficult to determine their value in the short term when the values of the underlying assets continue to fall. Thus there is a huge risk that the government will overpay for these assets and the taxpayer will be left holding the bag while the bankers clean their books and go on to make a lot of money for themselves and their stockholders. This would be a great American travesty. So as the carpenter says: Measure twice and cut once. We will only get one bite at this apple.